Talk to an Expert (416) 226-9840
Toll-Free: 1 (888) 550-TCAS
Alliott Global Alliance
Tax Planning Services & Preparation
CTO Services
Cross-Border Tax Services
Voluntary Disclosure Program
Immediate Expensing of Capital Property of Up To $1.5 Million Per Year
To encourage businesses to invest in assets that promote productivity growth, legislation was recently passed to temporarily allow certain corporations and individuals to immediately expense up to $1.5 million of eligible capital property in each year starting in 2021. Implementing the new rules would result in significant tax deductions and increase cash flow.
What types of businesses are eligible
To be eligible, taxpayers must be one of the following:
Canadian-controlled private corporations (CCPCs); or
Unincorporated businesses carried on directly by Canadian resident individuals (other than trusts); or
Canadian partnerships where all the partners are CCPCs or Canadian resident individuals (other than trusts).
The individual or partnership must satisfy the qualifications and maintain their status throughout the taxation year.
Muti-tiered partnerships, those who which have other partnerships as members, are ineligible.
Rule specifics
Dates on when the capital property must be acquired and available for use differ on the type of business:
Date property must be acquired
Date property must be available for use
CCPC On or after April 19, 2021 Before January 1, 2024
Canadian resident individual or a partnership where all the members are individuals On or after January 1, 2022 Before January 1, 2025
Partnerships where not all the partners are Canadian resident individuals On or after January 1, 2022 Before January 1, 2024
The capital property must also be immediately expensed in the year that it becomes available for use and the half-year rule would not apply.
As mentioned, the maximum amount that can be immediately expensed is $1.5 million. This limit follows similar rules that pertain to the small business deduction in which it must be shared among members of an associated group. The limit would also be prorated for taxation years that are shorter than 365 days and no carry-forward of excess capacity is allowed for businesses with less than $1.5 million of eligible capital costs.
If the eligible property is greater than $1.5 million, businesses can choose which items would be attributed to immediate expensing and which should be subject to the normal capital cost allowance (CCA) rules.
It is worth mentioning that there are differing CCA rules for each class and certain properties may have other enhanced deductions. As such, it is highly recommended that businesses speak with their accountant to ensure that the benefits of both the new and old rules are maximized.
What types of capital properties are eligible
All properties subject to CCA rules are eligible, except for those that belong in the following CCA classes:
Classes 1 to 6 (e.g., buildings, greenhouses, structures)
Class 14.1 (e.g., goodwill)
Class 17 (e.g., surface construction such as roads)
Class 47 (e.g., transmission or distribution equipment and structures used for transmission or distribution of electrical energy)
Class 49 (e.g., pipelines, including monitoring devices used for the transmission of oil and gas)
Class 51 (e.g., pipelines, including control and monitoring devices used to distribute natural gas)
The property must also
not have been previously owned by the taxpayer or non-arm's length person, i.e., acquired from a third party
not been transferred to the taxpayer on a tax-deferred roll-over basis
Note that leased assets are ineligible for the new rule seeing the full amount of the lease payments would have already been deducted for tax purposes. In comparison, assets purchased through financing agreements are subject to CCA rules and would be considered eligible.
The following example is adapted from the Department of Finance explanatory notes.
Facts and assumptions – A CCPC invest $2 million in equal amounts to acquire two properties: one in CCA Class 7 (15%) and another in CCA Class 10 (30%). All properties become available for use in the year in which they are acquired. CCPC is not associated with any other eligible businesses, as such, its immediate expensing limit is $1.5 million for the year.
As illustrated below, the new rules would permit a total 1st-year CCA deduction of up to $1,725,000 compared to $675,000 under the previous rules, an additional deduction of $1,050,000 in the year.
CCA class (rate)
Cost of acquisitions
Immediate expensing
1st-year CCA on remainder of class
Total 1st-year CCA
1st-year CCA under previous rules
Class 7 (15%) $1,000,000 $1,000,000 - $1,000,000 $225,000
Class 10 (30%) $1,000,000 $500,000 $225,000 $725,000 $450,000
Total $2,000,000 $1,500,000 $225,000 $1,725,000 $675,000
Tax planning recommendations
To maximize the benefit of this new rule
You may want to consider accelerating your fixed asset acquisitions up to $1.5m, if cash flow permits, seeing the temporary nature of the rule.
If currently on the fence between financing or leasing an asset acquisition, consider this new tax benefit as a tiebreaker
It may be worthwhile to time purchases if the total cost would be more than $1.5 million. For instance, if the business has already acquired more than $1.5m in the current year, and more acquisitions were planned for this year, consider delaying remaining acquisitions to following year.
If the acquired eligible properties are greater than $1.5 million, then it is generally more favourable to immediately expense those that belong in classes with the lowest CCA rate. Again, certain properties may have other enhanced deductions and should be considered in the calculations.
Department of Finance Canada - Expansion of the Eligibility for Tax Support for Business Investments
https://www.canada.ca/en/department-finance/news/2022/02/expansion-of-the-eligibility-for-tax-support-for-business-investments.html
Prasad & Company LLP is a proudly Canadian accounting firm with over 35 years of professional experience. We are headquartered in Thornhill, Ontario and have a satellite office in Vancouver, B.C.
Tax Return Deadlines in Canada 2023
Holding Companies 101: A Guide
Thornhill, ON L3T 1Z5
Email: info@prasadcpa.com
880-1140 West Pender Street Vancouver, BC V6E 4G1
Don't Miss Any Updates!
© 2023 Prasad & Company LLP, Chartered Professional Accountants
Design, Development by OneCore Media
Requested Service: Business Planning Assurance & Advisory Corporate Finance